How Worried Is the WaPo About Inflation?

I’m not particularly worried about ordinary inflation because I remain confident that the Fed governors have the tools to address it and will be willing to use them. The editors of the generally pro-Democratic Washington Post, however, are clearly becoming nervous about the Congressional Democrats’ willingness to spend with little regard to the size of the public debt or actual economic fundamentals:

EVEN BEFORE the U.S. and world economies have fully emerged from the near-depression induced by the needed public health response to covid-19, a new worry is already coming to the fore: inflation. The idea, broadly, is that the massive $1.9 trillion U.S. fiscal support package, coupled with the Federal Reserve’s aggressive bond-buying and interest-rate cutting, will stimulate the economy beyond what is needed to restore production to pre-pandemic levels, resulting in tight markets for everything from labor to lacrosse sticks — and corresponding price increases.

This is not a fringe view, but a serious one voiced by serious economists such as former treasury secretary Lawrence H. Summers. And yet the people responsible for making sure the United States never again sees inflation on the scale of the 1970s — the Federal Open Market Committee — reject it. The Fed unanimously voted Wednesday to keep monetary policy on its present course, which seeks to boost inflation to the annual target of 2 percent and keep it there, on average, over years, even if it means running above that level for extended periods.

Here’s the meat of their editorial:

The catch is that some of the structural factors that limited wage and price inflation for the past quarter-century — notably the integration of China into global commerce, and the massive increase in the supply of labor that it created — are not only diminishing but shifting into reverse. If such developments are creating a more inflationary environment than the Fed now estimates, the U.S. central bank’s plans will be disrupted, and it will confront inflation much sooner than it, and the markets, are currently projecting. Once destabilized, inflation expectations have a way of getting out of control — fast.

They go on to give a shout out to the Phillips Curve without mentioning it by name, if only to dismiss it. When I was taking economics courses, the Phillips Curve, an inverse relation between inflation and unemployment, was treated as Holy Writ. Since then it has not received empirical support.

What concerns me are the other risks that present policy brings:

• Increasing income and wealth inequality
• Catastrophic loss of confidence in U. S. credit
• The political and civil unrest that might come from the previous two risks

The Fed doesn’t have the tools to deal with any of those and I’m skeptical that the Congress has the political will to address them should they materialize.